28th September 2012Acquisition Analysis: as at 1 July 2008,Net fair value of identifiable assets, Liabilities and contingent liabilities Delphi Ltd = (180,000+20,000+30,000+ 72,000) (equity)- 12,000(goodwill) + (25,000) (1-30%) (BCVR-Land)+ (2,000) (1-30%) (BCVR-Buildings)+ (20,000) (1-30%) (BCVR-Inventory)+ (8,000) (1-30%) (BCVR-Plant)+ (2,000) (1-30%) (BCVR-Delivery Truck)+ (45,000) (1-30%) (BCVR-Patent) - (30,000) (1-30%) (BCVR-Contingent Liability)= $ 311,600Cost of Combination = 302,000 Goodwill Acquired = (311,600-302,000) = $ 9,600Unrecorded Goodwill= 12,000-9,600= $ 2,400Workings 1:The BCVR & pre-acquisition worksheet journal entries ONLY at 30 June 2011:The BCVR as at 30 June 2011,With the inventory, it has been sold by 30 June 2009 and there will be no need to prepare a business combination valuation journal entry for the aforesaid asset.
The calculated valuation for the asset is likely to have been to have been posted to retained earnings of the period ending 30 June 2009.With the building, it is still held by the group. The initial adjustment entry is similar to the one of the acquisition date. An accumulated depreciation of $ 20,000[$ 75,000- $ 55,000] is scrapped-off and the building reduced from $ 75,000 to a fair value reflecting $ 57,000, which translates to $ 18,000.
The $ 2,000 difference is shared between deferred tax liability (30%) and business valuation reserve (70 %). The entry is reflected continuously for the period the asset is held by the Company at hand. This procedure is applied for plant which has an accumulated depreciation of $ 78,000[being $ 260,000- $ 182,000] and the cost is reduced to $ 190,000 which is deduced from $ 260,000,[ $ 260,000- $ 190,000], a figure of $ 70,000. The difference between $ 78,000 and $ 70,000, $ 8,000 is shared between deferred tax liability (30 %) and business combination valuation reserve (70 %).
For delivery truck, $ [90,000-36,000] = $54,000, [$ 90,000- $ 38,000] = $ 52,000. The difference, $ 2,000 being $ [54,000-52,000] is apportioned between deferred tax liability (30 %) and business combination reserve entry (70 %). For Office Furniture, the difference results to a zero amount. There will be no need to account for delivery truck since it was already sold before the reporting took place. In this valuation entry though, the plant is depreciated on a straight line basis for a 5 year period.
The acquisition date was 1 July 2008 and the reporting date is 30 June 2011. This translates to a 3 year period between the two aforementioned dates. The BCVR entry for plant needs to reflect relevant adjustments for the period under consideration and 2 year prior financial period depreciation. The adjustment to the plant is valued at $ 8,000. Using a 20 % depreciation rate [20 % * $ 8,000] we derive the depreciation per annum to be $ 1,600, for Buildings, the adjustment to it is valued at $ 2,000.
Taking the depreciation rate at 20 %, we deduce that an amount of $ 4, 00 per annum [20 % * 2000] is termed adjustable. At this point, it is notably clear that the sitting period depreciation is altered at the depreciation expense while for the prior two periods, it is expected that the depreciation affect the retained earnings. The total depreciation amount is altered against the resultant accumulated depreciation amount. The amount of deferred tax liability= adjustment to accumulated depreciation multiplied by tax rate, in this assignment it is: $, 4, 800 for plant and $ 1,200 for building, deriving, $ 4,800 * 30 % = $ 1,440 for plant and $ 1,200 * 30 % = $360 for buildings.
The BCVR entries as at 30 June 2011 is as follows: Accumulated depreciation — BuildingBuildingDeferred tax liabilityBusiness combination valuation reserveAccumulated depreciation-Plant Plant Deferred Tax Liability Business combination valuation reserve DrCrCrCrDrCrCrCr20 00078,00018 000 6,001,20070,0002,4005,600Depreciation expense-PlantRetained earnings (1/7/08)Accumulated depreciation-Plant(20% $8000 p. a.
for three years)Depreciation expense-BuildingRetained earnings (1/7/08)Accumulated depreciation-Building(20% $2,000 p. a. for three years)DrDrCrDrDrCr2,4002,4006,006,004,8001,200Deferred tax liability( Plant plus building)Income tax expenseRetained earnings (1/7/08)DrCrCr1,800900900GoodwillBusiness combination valuation reserveDrCr2,4002,400Pre – acquisition Entries as at 30 June 2011 As at 1 July 2008 the entry is as follows: Retained earnings (1/7/08)Share capitalGeneral reservePlant Maintenance ReserveBusiness combination valuation reserveShares in Delphi LtdDrDrDrDrDrCr72 000180 00020 00030 000 -302 000 As at 30 June 2011, the Pre-acquisition entries changes due to: Changes in inventory status: [30 % *(15,000)] + [30 % * $ (27,000-25,000)] = $ 5,100As at 1 July 2008 the entry is as follows: